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Regulation, institutions and productivity
Regulation, institutions and productivity
OECD Economics Department
June 2017

Empirical research on the drivers of multi-factor productivity (MFP) is abundant at the firm and industry level but surprisingly little research has been conducted on the determinants of MFP at the macroeconomic level. In this paper, we seek to understand the drivers of country-level MFP with a special emphasis on product and labour market policies and the quality of institutions.

For a panel of OECD countries, anticompetitive product market regulations are associated with lower MFP levels and that higher innovation intensity and greater openness go in tandem with higher MFP. We also find that the impact of product market regulations on MFP may depend on the level of labour market regulations. Better institutions, a more business friendly environment and lower barriers to trade and investment amplify the positive impact of R&D spending on MFP. Finally, we also show that cross-country MFP variations can be explained to a considerable extent by cross-country variation in labour market regulations, barriers to trade and investment and institutions (including corruption).

Regulation, institutions and productivity: New macroeconomic evidence from OECD countries
Key findings
Anti-competitive product market regulations are associated with lower multi-factor productivity levels.
Higher innovation intensity and greater openness result in higher multi-factor productivity.
The impact of product market regulations on multi-factor productivity may depend on the level of labour market regulations.